Serpent's Egg

The Eroticism of Fat Men

Four charts that show how Britons are living beyond their means

debt

British households will live beyond their means well into the next decade as low interest rates encourage households to raid savings and take on more debt, official forecasts show.

The Office for Budget Responsibility (OBR) said the persistence of such a large household deficit was “unprecedented” in historical data stretching back to the 1960s, as its forecasts suggested there was little chance that the UK economy will rebalance away from a reliance on consumer-led growth.

Following a week where the fiscal watchdog was forced to defend its “gloomy” Brexit forecasts, Lord Lawson branded Philip Hammond’s decision to freeze fuel duty in the Autumn Statement as a “mistake” and described the Government’s triple lock on state pensions that guarantees a rise of at least 2.5pc each year as “difficult to justify”.

Household financial balance (£bn)Households are expected to spend more than theyearn into the next decadeSource: OBR2008201020122014201620182020-75-50-250255075100Highcharts.com

The former chancellor urged Mr Hammond to focus on preparing the economy to leave the EU rather than obsessing with forecasts. He said “intelligent deregulation” would be a “great liberation” for the British economy.

The OBR’s forecasts show that households are expected to spend £34bn more than they earn this year, rising to £49.6bn in 2021 as they borrow more or sell assets such as shares to fuel spending.

While the deficit projections have narrowed since March, the unsecured debt-to-income ratio is projected to rise to 45pc by 2021, from 40pc in 2016.

%Britons expected to keep driving down savings asconsumption grows slightly faster than disposableincomeSource: OBR, ONSHeadline saving ratioSaving ratio excluding pension saving2000Q12002Q12004Q12006Q12008Q12010Q12012Q12014Q12016Q12018Q12020Q1-5051015Highcharts.com

However, the OBR said its “systematic” overestimation of the pace of mortgage debt growth in previous forecasts drove downwards revisions to its estimates of the overall debt-to-income ratio to 149pc by 2021, from 142pc this year.

It previously projected that debt-to-income would rise to 164pc by the end of the decade, close to its pre-crisis peak.

Confident consumers have kept on spending in recent years, despite weak pay growth.

Household gross debt to income (%)“Systematic” overestimation of pace of mortgage debtgrowth saw OBR revised down debt to incomeforecastsSource: OBR, ONSMarch forecastNovember forecast2005Q22007Q22009Q22011Q22013Q22015Q22017Q22019Q22021Q2130140150160170Highcharts.com

While the fall in the value of the pound is forecast to support growth over the next two years through a rise in net trade, the OBR expects negotiation of new trading arrangements to slow import and export growth for a decade.

“On these forecasts there’s certainly no sign of rebalancing in the UK economy, growth is certainly very much consumer led despite the uncertainty and expected sharp slowdown in real wages, households are not expected to run up precautionary savings,” said Scott Bowman, an economist at Capital Economics.

While the OBR’s forecast show a rise in unsecured debt, the data also showed the household net worth to income ratio is expected to remain steady, at a lofty 881pc in 2021, suggesting households’ financial positions remain strong.

Private non-financial sector credit growth (%oya)Aggregate credit growth is rising, but at nowherenear the pace seen before the financial crisisSource: Bank of England, ONSPrivate non-financial sector credit growth (%oya)19701980199020002010-100102030Highcharts.com

While aggregate credit growth, which the Bank of England monitors closely for threats to financial stability, has picked up in recent months, the pace of expansion is well below the rates seen ahead of the financial crisis.

Sir Jon Cunliffe, the deputy governor of the Bank of England, has suggested that policymakers could act if credit began again to grow faster than nominal GDP.

While low interest rates have spurred confidence to take out credit, the Bank is also watching for signs that consumption is becoming more debt financed, which would be less sustainable if a downturn hit.

Lord Lawson: Hammond must focus on the deficit

Lord Lawson said Mr Hammond had “made a mistake” by not using his final Autumn Statement to generate more taxation revenues.

“I suppose that was a political judgement, but the fuel tax has now been frozen for several years, and I don’t think that is at all sensible,” he said.

Lord Lawson also said the triple lock was unsustainable in its current form.

“The triple lock on pensioners that ensures that in some cases they do better than working people makes no sense at all. It might become affordable if inflation rises, but the present system, where low levels of inflation mean pensions go up faster than earnings is difficult to justify.”

He also described the OBR’s latest forecasts on the impact of Brexit on the economy as “not worth the paper it’s written on”.

He said: “People love forecasts. everybody wants to know what the future is going to hold, that’s why in the fairground, people go to the gypsy fortune teller, but the fortune teller doesn’t know, and neither does the OBR.”

Lawson
Lord Lawson served as Chancellor in the 1980s CREDIT: PA
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This entry was posted on November 27, 2016 by and tagged , .

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